2023-07-06 07:56:18 ET
Summary
- Growth and momentum at Magnachip Semiconductor stand at a critical juncture on a natural path to expansion or perhaps stagnation.
- MX stock is lightly followed and traded. Once bullish the bloom faded and the price withered. Hold or Moderate Buy can be an opportunity for small investors but cautiously.
- Headwinds and risks outweigh some forecasts for an average target price of $13 to $16 but we are skeptical.
Healing Remedies
Magnachip Semiconductor Corporation ( MX ) is a lightly followed and traded stock. We were bullish about Magnachip last August when a share sold for $14.41 each. Then the bloom faded and the price withered.
In our opinion, retail value investors have an opportunity to benefit from Magnachip's lower price and hearty sales. It is an essential industry to modern industrial growth. Its products target the industry's growth segments: displays, power, and automotive. More money and effort will have to be dedicated to the R&D of new products, new technologies spurred by AI, and customer acquisition and retention to build future sales and earnings and stay competitive. But headwinds and risks abound.
We lowered our assessment of the stock Hold to Moderate Buy over the next 12 months. The average price target among analysts following the shares is $13 to $16 based on their forecasts of better company returns on assets and equity. Based on comments made by officers during the last talk with shareholders, we do not foresee any share price improvement in the near term.
Officers spoke about delivering a new chip to a Korean phone customer. This was followed by, "We are also going to production with automotive this mid-May. So those are the key progress with that customer." They highlighted incremental shipments of other products in the evaluation stage. It seems to us that positive impacts on revenue and earnings are many quarters out.
Our average price target is struck at about $11 to $12 at the moment. We do not expect the company to report much-improved earnings and revenue in the next two and perhaps three quarters. We do not believe the cash burn can afford faster or bigger stock buybacks than already underway.
One positive is the non-volatility of the stock. Its 0.54 Beta can be reassuring to shareholders who do not want swings in the price of their holdings. But the share price does move on news reports more than numbers.
For example, the share price bottomed at about $8.41 in mid-May. It bounced to ~$11.22 in days following a company announcement to reorganize , separating its display and power businesses for more effective and efficient control by corporate leaders of more manageable segments. A short time before, the company debuted a new family of products. Third, it reiterated intentions to complete the buyback program announced last September. Fourth, earlier when the company announced a 5% staff cutback through early retirement the stock rose 2.7%.
On a larger space, Magnachip investors are motivated by indications for a rebound in China's economy and auto industry . In the recesses of their minds lurk the eternal hope for buyouts and takeovers after years of talk. The stock topped $28 in 2021 on talk of a takeover but the talks and share price collapsed.
Sparking An Uptick
Magnachip Semiconductor Corporation is a 20 years old business headquartered in South Korea. It produces analog and mixed-signal semiconductor platform solutions for communications, the Internet of Things, and consumer, industrial, and automotive applications.
It operates 3 segments: display solutions, power businesses, and automotive solutions. After the separation of the display and power solutions segment the company will establish a new subsidiary (NewCo).
Under the transaction, all assets and liabilities of the display business will be contributed to NewCo in exchange for equity. Magnachip Korea and NewCo will be separate operating companies, with NewCo being a wholly-owned unit of Magnachip Korea. It will remain with Magnachip Korea as a main part of its power business, according to management:
The internal separation is aimed at enhancing transparency, accountability and flexibility in business… Furthermore, this strategic move will allow each entity to allocate its resources, both financial and technical, more effectively to the specific needs of its customers… The Internal Split-Off is not expected to have any material impact on the company's financial reporting, Magnachip noted .
The stock peaked in July '22. It then tumbled from +$16 to about $11 per share ending at $8.71 in January '23 despite a September claim management was repurchasing the remaining $50M of its $87.5M buyback program. Q4 reporting in February '23 that revenue for the quarter did not cascade (-44.7% Y/Y) as much as forecast lifted the share price; it resumed falling until the announcement of the reorganization when MX popped +4.78% premarket on May 30 to $11.17.
Sparking the share price rise, Magnachip Semiconductor reported in May its Q1 '23 earnings. In sum, Q1 Non-GAAP EPS was -$0.24 missing estimates by $0.04; revenue of $57M was -45.2% Y/Y, missing estimates by $4M, and its gross profit margin of 21% to 23% was below the Q4 margin of 26%. The next earnings report announcement is expected on August 14, '23.
Headwinds
We are unable to see any near-term let-up in the headwinds this company faces over the next year.
Lack of news and buzz about a stock depresses momentum; there is but scant coverage of Magnachip Semiconductor. Three bloggers we can find and a smidgeon of Wall Street analysts offer guidance. Few investors trade the stock. The average daily trade volume is below 80K shares.
The share price is down about 19% over the last 12 months including a +17% YTD uptick for the reasons we discussed previously. It sports a diminutive market cap of $472.5M. No dividend is paid and revenue and earnings forecasts for the next 12 to 18 months appear an unappetizing opportunity to retail value investors. The Q2 '22 EPS was $0.23. We expect Q2 '23 to be down 10% or more from that at $0.19 to $0.20. The company has a mixed record of beating forecasts 6 times over the last 9 quarters.
Revenue & Earnings (Seeking Alpha)
The bigger picture is murky. The Financial Times reports manufacturers warn the "chip industry slowdown will last longer than expected." Chips are being shipped to fill backorders from the pandemic and chips are now stockpiled. Sales fell in February and increased 0.3% in March, according to the Semiconductor Industry Association:
Month-to-month sales in April increased in China (2.9%) and Japan (0.9%), but decreased in Europe (-0.6%), the Americas (-1.0%), and Asia Pacific/All Other (-1.1%). Year-to-year sales in April were up in Europe (2.3%), but down in Japan (-2.3%), the Americas (-20.5%), Asia Pacific/All Other (-23.9%), and China (-31.4%).
Magnachip suspended production at its Gumi, South Korea plant for a week due to high inventory and low demand. It announced in June the company started producing a new semiconductor for automotive energy recovery that is expected to improve fuel economy and cut emissions. We cannot estimate the sales volume, the profit generated from the new chip, or delivery date to automakers at this time.
S A's Quant Rating gives the stock a Hold assessment, as growth dived from a B+ Factor Grade to an F
Quant Rating & Factor Grades (Seeking Alpha)
Risks
The good news from S A is that the Quant Rating is leaning to the buy-side when for months it was assessing the stock to the sell-side. Momentum still is not vibrant but it is improving and the valuation is strong. Valuation metrics rate As and Bs except for the Fs per EV/EBITDA and Price/Cash Flow. We are reluctant to assign a high grade to valuation because the free cash flow is -$32.98M and that weighs heavy on a firm's growth.
The stock deserves a more modest valuation (C+ or B-) when we look at other metrics. In our experience, for instance, +$400K revenue per employee is a benchmark for profitability. Operating cash flow during the last 12 months was $221,000 and capital expenditures -$22.04 million, giving a free cash flow of -$21.81 million. There is a plethora of other negative numbers too insurmountable to overcome in the short term:
Other valuation metrics (Stock Analysis)
The good news is that the prognosis for long-term chip sales is expected to increase by 11% in 2024. The bad news is 2023 is likely to suffer a 10% drop in chip sales. Magnachip ought to be able to wait out the turnaround because its capital structure appears healthy. Debt is but $6M while cash and equivalents exceed $212M. It was $225.47M in Q1 '23. Its Enterprise Value is $261.02M. Total assets far outstretch total liabilities.
We do not anticipate routine news that will push down the share price; short interest is a mere 2.4%. Nevertheless, net cash from operations fell in 3 months ended March 2023 to $7.87M from March 2022's $12.8M.
Corporate insider buys outdistance their selling but keep in mind their options and warrants might be used for enhanced compensation when a stock pays no dividend. Hedge funds on the other hand cut their holdings after the shares moved up to $19 at the end of last summer; funds cut another 557.7K shares over the last quarter despite the uptick to $11 from ~$8. The number of funds concomitantly decreased from 36 to 24; that is the fewest funds holding Magnachip shares in 3 years.
Magnachip filed an SEC Form S-8 allowing it to register new securities it offers employees as a benefit (filed June 23, 2023) that may dilute shareholders. shareholders:
Years ago, a Chinese firm talked about buying Magnachip Semiconductor we think for $29 per share. The U S blocked the sale. In 2023, the company is trapped in a tenacious web. Its headquarters is situated in one of America's staunchest allies, South Korea, and sells into China.
Its product sales are being hurt by sanctions the U S applies to China, particularly semiconductors and other tech products the Chinese can use for military purposes. One chip maker claims it might lose $400M in sales in one quarter. Magnachip seems to be more a moving M&A target than a hunter/builder since it does not spend money or stock on acquisitions for growth.
In a final thought about risks to investors, we must question Magnachip's capabilities and resources to build an Artificial Intelligence infrastructure to manage the supply of the right chips to fast-changing demands, pricing, and inventories. Big chip companies are spending billions of dollars on AI to
avoid "supply-and-demand mismatches across chip sizes, industries, and production centers." This has to be a big challenge to a relatively small firm but Magnachip Semiconductor might be on the right track.
Takeaway
For now, we believe the best position for retail value investors is to consider Magnachip Semiconductor worth a Hold or Moderate Buy rating that makes it worth following. AI is the crucible that will most dramatically affect small chip firms in the near future. While Magnachip is buying back stock and managing its minimal debt it might find better uses for its cash treasure in a fast-changing industry dominated by behemoths spending billions of dollars on AI.
The company stands at a critical juncture on a natural path to expansion or perhaps stagnation. More money and effort will have to be dedicated to the R&D of new products, technologies, and customer acquisition and retention to get better grade assignments and stay competitive.
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Magnachip Semiconductor Corporation Stands At A Critical Juncture